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At least £25bn has been cashed in by savers anxious to take advantage of pension changes introduced four years ago.

The pensions freedom and choice reforms, introduced in 2015, allows over 55s to withdraw all or part of their pension fund.

Before April 2015, anyone with a pension would normally have to spend their pension fund on an annuity, a form of insurance policy which pays out a guaranteed income for life.

The overhaul meant those with a personal pension or a type of occupational (work-based) pension known as a defined contribution pension could take their pension cash – these pensions pay out an amount based on how much has been paid in and how well that amount has been invested by the pension company.

There are some exceptions: savers in a final salary scheme or public sector pension are restricted as to how much they can withdraw, for example.

When the government unveiled the pension freedom regime there was concern some savers would blow their pension fund in one go. The average pension pot is £35,000 for a woman, or £179,000 for a man.

Going the distance

Peter Bradshaw, director for Selectapension, says this hasn’t happened. “Initially, commentators feared people would be reckless and blow their pension entitlements on lavish goods,” he says.

Bradshaw points out many people have opted to put their pension pot in a cash deposit account.

“Maybe because they thought a bank was a safer place than their pension scheme,” he adds.

Moira McKean, from Chester

Moira McKeen, pitured with her daughter Kendal, used her pension freedoms to set up a wedding dress company.

“I trained as a designer and pattern-cutter, but after working in London for years, commuting every day and travelling abroad, I moved into garment production.

“I had always wanted to have my own business, because I wanted to spend more time with my family. Also, my daughter Kendal was at a crossroads.”

Using Moira’s pension in 2016 with the help of her adviser, LEBC, they set up a wedding dress company, Along Came Eve.

“I had hoped to buy a business, but it wasn’t to be, so we started from scratch, finding premises, suppliers and refurbishing.

“I still have a part-time job, but I hope to go into the venture full time. We turned over £200,000 in our first 12 months and now we employ three people and are looking to set up another shop.”

Kay Ingram, director of public policy at retirement adviser LEBC, says people have been sensible.

“Popular uses include paying off debt before retiring, tenants withdrawing lump sums to buy a home, helping other family members, paying for private medical treatment or care, funding a special holiday or celebration, providing an income top-up before state pension age, funding retraining, a new business or hobby,” she explains.

Four years on, pension experts are concerned that younger savers might not be able to reap the same benefits from pension freedom as their parents. Emma Byron, managing director at Legal & General Retail Retirement Income says younger people face a much longer retirement.

She is concerned not enough planning is going into a retirement that could last 30 years-plus. “In some instances, this could be leading people to make decisions that are not right for them.”

Saga says there is still a “dire need for advice relating to pension freedom” and there was still potential for pension freedom to backfire on those with smaller pension funds. The firm’s survey found 84 per cent of UK adults had no idea what pension freedom was.

The real winners?

Ingram adds that anyone thinking of using pension freedom needs to be aware they could run out of money if they don’t plan properly.

She says: “Ideally, essential spending should be funded by guaranteed income, such as the state pension.”

The real winners of pension freedom may in fact be the government. While every saver is entitled to take out 25 per cent of their entire pension tax-free, the rest is taxable – and there is evidence that some retirees have been caught out.

Bradshaw says: “While pension freedom has been a mixed success the government has certainly benefited with pensioners paying more income tax.”

On the whole, the scheme has given control back to savers, says Ingram. “It has enabled renters to become homeowners and enjoy security of tenure in retirement, something they thought was beyond their reach,” she adds.

Pete Glancy, head of policy at Scottish Widows, points out that while £25bn – the amount cashed through pension freedoms over the past four years – might sound like a lot in isolation, pension savers are still putting away £90bn annually.

He added: “Understandably, there is some concern that people dipping into retirement savings will run out of money, as many underestimate how long they’ll live for.

“What is more concerning are those workers lulled into a false sense of security by auto enrolment, who believe the 8 per cent minimum saving level will be enough for a comfortable retirement.”

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